Bank of Canada raises rate to 1.75%, signals more hikes to come

Posted on Oct 24, 2018 in

The Bank of Canada finally can see “home” on the horizon.

Governor Stephen Poloz and his deputies on the Governing Council raised the benchmark interest rate a quarter-point to 1.75 per cent on Oct. 24, as expected.They said they feel pretty good about the economy, now that politicians in Canada, Mexico, and the United States have agreed on a revised trade agreement, and that evidence suggests Canadian households are adjusting well to higher borrowing costs. Policy makers raised their outlook for business investment and exports, suggesting the economy is becoming less reliant on debt-fuelled spending and the housing market.The Canadian economy continues to operate close to its potential and the composition of growth is more balanced,” the central bank said in latest policy statement.Canada’s economy is growing a little faster than the Bank of Canada predicted a few months ago, and “vulnerabilities” from elevated levels of household debt are “edging lower,” the statement said. Policy makers reiterated that interest rates must rise, and for the first time offered a more definitive notion of where it wants to go.“Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target,” the statement said.Poloz, who took over as the governor of Canada’s central bank in 2014, has talked wistfully about returning interest rates to a level that economists associate with normal, a place where the cost of money is neither stimulating expansion nor curbing growth. The central bank estimates that “neutral” interest rate — which Poloz has characterized as “home” — is something between 2.5 per cent and 3.5 per cent.There will be a debate on Bay Street and Wall Street about how fast the Bank of Canada wants close the gap between the neutral rate and the current setting. Some analysts and investors will note that the Bank of Canada dropped “gradual,” a word that policy makers had used in three consecutive policy statements to make sure the public knew that the economy was facing a lot of headwinds.There will be a temptation to assume that the central bank’s decision to erase old modifiers is a signal that interest-rate increases will become more frequent. In fact, the Bank of Canada’s outlook is about the same as it was a few weeks ago; if there’s a shift, it’s that policy makers are more confident that outlook will come true.

More likely, Poloz, who has made a point of avoiding explicit guidance, wanted to keep investors and other from reverting to their old habits of putting textual analysis ahead of number crunching. The new policy statement says the pace of interest-rate increases will be determined by “how the economy is adjusting to higher interest rates, given the elevated level of household debt” and “global trade policy developments.” The resolution of the North American trade dispute is a relief, but the central bank expressed heightened concern of the U.S. trade war with China.Mark Chandler, head of Canadian rates strategy at RBC Capital Markets, anticipated that the Bank of Canada might change its phrasing. He advised his clients to avoid over-analyzing any decision to remove “gradual” from the statement. “While markets may be geared to interpret this as a clearly more hawkish signal, we suspect it would have more to do with the Governing Council’s unease with the [explicit] path it implies of 25 [basis points] per quarter rather than the data dependent path they want to emphasize,” Chandler said in a note published on Oct. 23.That’s probably right. The numbers suggest interest rates could be higher, but that understanding of the economy is based on periods when household debt was much lower than it is now. The central bank went out of its way to state that even though its comfortable with the way Canadians are adjusting to higher borrowing costs, household vulnerabilities “remain elevated.”

The Bank of Canada finally can see “home” on the horizon.Governor Stephen Poloz and his deputies on the Governing Council raised the benchmark interest rate a quarter-point to 1.75 per cent on Oct. 24, as expected.They said they feel pretty good about the economy, now that politicians in Canada, Mexico, and the United States have agreed on a revised trade agreement, and that evidence suggests Canadian households are adjusting well to higher borrowing costs. Policy makers raised their outlook for business investment and exports, suggesting the economy is becoming less reliant on debt-fuelled spending and the housing market.“The Canadian economy continues to operate close to its potential and the composition of growth is more balanced,” the central bank said in latest policy statement.Canada’s economy is growing a little faster than the Bank of Canada predicted a few months ago, and “vulnerabilities” from elevated levels of household debt are “edging lower,” the statement said. Policy makers reiterated that interest rates must rise, and for the first time offered a more definitive notion of where it wants to go.“Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target,” the statement said.Poloz, who took over as the governor of Canada’s central bank in 2014, has talked wistfully about returning interest rates to a level that economists associate with normal, a place where the cost of money is neither stimulating expansion nor curbing growth. The central bank estimates that “neutral” interest rate — which Poloz has characterized as “home” — is something between 2.5 per cent and 3.5 per cent.There will be a debate on Bay Street and Wall Street about how fast the Bank of Canada wants close the gap between the neutral rate and the current setting. Some analysts and investors will note that the Bank of Canada dropped “gradual,” a word that policy makers had used in three consecutive policy statements to make sure the public knew that the economy was facing a lot of headwinds.There will be a temptation to assume that the central bank’s decision to erase old modifiers is a signal that interest-rate increases will become more frequent. In fact, the Bank of Canada’s outlook is about the same as it was a few weeks ago; if there’s a shift, it’s that policy makers are more confident that outlook will come true.More likely, Poloz, who has made a point of avoiding explicit guidance, wanted to keep investors and other from reverting to their old habits of putting textual analysis ahead of number crunching. The new policy statement says the pace of interest-rate increases will be determined by “how the economy is adjusting to higher interest rates, given the elevated level of household debt” and “global trade policy developments.” The resolution of the North American trade dispute is a relief, but the central bank expressed heightened concern of the U.S. trade war with China.Mark Chandler, head of Canadian rates strategy at RBC Capital Markets, anticipated that the Bank of Canada might change its phrasing. He advised his clients to avoid over-analyzing any decision to remove “gradual” from the statement. “While markets may be geared to interpret this as a clearly more hawkish signal, we suspect it would have more to do with the Governing Council’s unease with the [explicit] path it implies of 25 [basis points] per quarter rather than the data dependent path they want to emphasize,” Chandler said in a note published on Oct. 23.That’s probably right. The numbers suggest interest rates could be higher, but that understanding of the economy is based on periods when household debt was much lower than it is now. The central bank went out of its way to state that even though its comfortable with the way Canadians are adjusting to higher borrowing costs, household vulnerabilities “remain elevated.”See the original link here

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